AccountancyProvisions and reserves
A provision is set aside because something is expected to cost money. A reserve is kept back to make the business stronger. One is a charge, the other is a choice.
Provision
A provision is an amount set aside out of revenue for a known liability or loss whose amount cannot be fixed exactly. It follows the principle of prudence: expected losses are provided for, even before they are certain.
- Provision for depreciation.
- Provision for doubtful debts.
- Provision for discount on debtors.
- Provision for taxation.
- Provision for repairs and renewals.
A provision is a charge against profit: it is debited to the Profit and Loss Account and must be made even when there is a loss. In the balance sheet it is shown either as a deduction from the asset concerned (doubtful debts from debtors) or on the liabilities side (taxation).
Reserve
A reserve is a part of profit kept back in the business to strengthen its financial position, to meet unknown future losses or to finance growth. It is an appropriation of profit: it is created only when there is a profit, after the profit has been found. Reserves belong to the owners and appear with capital on the liabilities side.
Difference between provision and reserve
| Basis | Provision | Reserve |
|---|---|---|
| Nature | Charge against profit | Appropriation of profit |
| Purpose | To meet a known liability or expected loss | To strengthen the financial position |
| When made | Even if there is a loss | Only when there is a profit |
| Effect on taxable profit | Reduces profit before it is found | Created after profit is found |
| Use for dividend | Cannot be used | A general reserve can be |
| In the balance sheet | Deducted from the asset or shown as a liability | Shown with capital |
Types of reserves
- Revenue reserve: created out of profit from normal operations. A general reserve has no stated purpose and can be used for anything, including dividend. A specific reserve is for a named purpose: dividend equalisation reserve, workmen compensation fund, investment fluctuation fund, debenture redemption reserve.
- Capital reserve: created out of capital profits, which do not arise from normal trading: premium on issue of shares or debentures, profit on sale of fixed assets, profit on reissue of forfeited shares, profit before incorporation. A capital reserve is not available for dividend.
- Secret reserve: a reserve that exists but is not visible in the balance sheet, because assets are understated or liabilities overstated, for example by charging too much depreciation. It hides the true position and is generally not permitted for companies.
Provision for doubtful debts, solved
Not every debtor pays. Debts known to be lost are bad debts. For debts that may be lost, a provision is created as a percentage of debtors.
Example. On 31 March 2026 the trial balance of Shree Agencies shows: debtors ₹2,05,000; bad debts ₹4,000 (already written off); provision for doubtful debts (from last year) ₹6,000. Adjustments: write off further bad debts ₹5,000; maintain the provision at 5% of debtors.
- Debtors after further bad debts: ₹2,05,000 − ₹5,000 = ₹2,00,000.
- New provision: 5% of ₹2,00,000 = ₹10,000.
- Charge to Profit and Loss A/c for the further bad debts and the provision: ₹5,000 + ₹10,000 − old provision ₹6,000 = ₹9,000. The ₹4,000 already in the trial balance is charged separately as bad debts.
| Date | Particulars | ₹ | Date | Particulars | ₹ |
|---|---|---|---|---|---|
| Mar 31 | To Bad Debts A/c (further) | 5,000 | Apr 1 | By Balance b/d (old provision) | 6,000 |
| Mar 31 | To Balance c/d (new provision) | 10,000 | Mar 31 | By Profit and Loss A/c | 9,000 |
| 15,000 | 15,000 |
In the balance sheet: Debtors ₹2,05,000 less further bad debts ₹5,000 = ₹2,00,000, less provision ₹10,000 = ₹1,90,000.
If the old provision is larger than needed
Suppose the old provision had been ₹18,000. Requirement = ₹5,000 + ₹10,000 = ₹15,000. The excess of ₹3,000 is credited to the Profit and Loss Account as provision no longer required.
Provision for discount on debtors
Debtors who pay promptly may be allowed cash discount. A provision for it is made on good debtors only: debtors after deducting bad debts and the provision for doubtful debts. At 2% in the example above: 2% of ₹1,90,000 = ₹3,800.
Why reserves matter
- They cushion the business against bad years.
- They finance expansion without borrowing.
- They allow a steady dividend in lean years.
- They can be required by law or by loan agreements.
How provisions and reserves appear in the year-end statements is shown on the adjustments page.
Questions students ask
What is the main difference between a provision and a reserve?
A provision is a charge against profit for a known liability or expected loss and is made even in a loss year. A reserve is an appropriation of profit, made only when there is profit, to strengthen the business.
Is general reserve shown on the assets side?
No. Reserves are shown on the liabilities side, with capital, because they belong to the owners.
On which debtors is provision for discount calculated?
On good debtors: debtors less bad debts and less provision for doubtful debts.
More Class 11 topics
For study, and independent. These pages explain accountancy as it is generally taught in Class 11, Class 12 and B.Com courses in India, in our own words with our own examples, reviewed in November 2026. This site is not connected with NCERT, CBSE, ICAI or any board or university. Syllabuses change: follow your own board's or university's current syllabus and textbook. Nothing here is professional accounting, tax or legal advice.